hesitation in going behind the returns to discover what would have been a proper cost. In a recent case in the United States Supreme Court 1 Mr. Justice Moody said: "The cause for the large variation between the real value of the property and the capitalization in bonds and preferred and common stock is apparent from the testimony. All, or substantially all, the preferred and common stock was issued to contractors for the construction of the plant, and the nominal amount of the stock issued was greatly in excess of the true value of the property furnished by the contracts. A single instance taken from the testimony will illustrate this. At the very start of the enterprise a contract was entered into for the construction of a part of the plant, which was of a value slightly, if at all, exceeding $124,000. The price paid the contractor was $125,000 in bonds and $200,000 in common stock. Other contracts for construction showed a like disproportion between value furnished and nominal capitalization received for that value. It perhaps is unnecessary to say that such contracts were made by the company with persons who, at the time, by stock ownership controlled its action. Bonds and preferred and common stock issued under such conditions afford neither measure of nor guide to the value of the property." 2

§ 1085. Plant built unnecessarily large.

If the plant as originally constructed is unnecessarily large the company should not expect a return upon its

1 Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. ed. 371, 29 Sup. Ct. 148 (1909).

2 The following cases, among others, make this point plain:

United States. Dow v. Biedelman, 125 U. S. 680, 31 L. ed. 841, 8 Sup. Ct. 1028 (1888).

Maine.-Kennebec Water Dist.

v. Waterville, 97 Me. 185, 54 Atl. 6, 60 L. R. A. 856 (1902).

Minnesota.-Steenerson v. Gt. Northern Ry. Co., 69 Minn. 353, 72 N. W. 713 (1897).

West Virginia.-Coal & Coke Ry. Co. v. Conley (W. Va.), 67 S. E. 613 (1910).

total investment. This is put in a striking manner in a recent case, thus: "For a simple illustration, suppose that a five hundred horse power engine was used for pumping when a one hundred horse power engine would do as well. As property to be fairly valued the larger engine might be more valuable than the smaller one, yet it could not be said that it would be reasonable to compel the public to pay rates based upon the value of the unnecessarily expensive engine." The reason for this is best expressed in another recent case 2 thus: "If a plant is built, as probably this was, for a larger area than it finds itself able to supply, or, apart from that, if it does not, as yet, have the customers contemplated, neither justice nor the Constitution requires that, say, two-thirds of the contemplated number should pay a full return."

§ 1086. Plant adapted for a larger population.

But where the plant is built larger at the outset than is required immediately with the idea of supplying an increased population a more complex problem arises; for it has recently been appreciated that in many cases the public interests may often be served best by such expenditures. In the late case of the Tintern Manor Water Company the court in determining what rates it would be reasonable to charge, made an elaborate investigation into the capital expenditures of the company, the results

1 Per Savage, J., in Brunswick & T. W. D. v. Maine Water Co., 99 Me. 371, 59 Atl. 537 (1904). See, also, Capital Gas Light Co. v. Des Moines, 72 Fed. 829 (1896).

2 San Diego L. & T. Co. v. Jasper, 189 U.S. 439, 47 L. ed. 892, 23 Sup. Ct. 571 (1903).

See also Boise City I. & L. Co. v. Clark, 131 Fed. 415, 65 C. C. A. 399 (1904).

of which are detailed by the court in one of the most practical discussions as yet to be found among all the opinions dealing with rate problems. The Vice Chancellor found in almost all items large excess in cost if the standard was a plant which would barely meet present needs; but this he said was not a conclusive test, as it was the right of the company, if indeed not its duty to its public, to provide against the future growth of the community to a reasonable extent. In applying these principles the Vice Chancellor makes plain the compromise he has in mind. For example, the main supply pipes are thirty-six inch; he estimates that this is providing in advance for more population than can reasonably be expected for fifty years, while a thirty inch main would provide for perhaps twenty years in advance. He deducts therefore, the difference, $75,000, the guiding principle being what will prove in the long run to be an enlightened policy for the best interests of all concerned. With much the same consideration in mind a Federal judge recently held that if a railroad is built in a new, sparsely settled territory with a view to serving a large future population and developing business, the Constitution does not require the few people and the small business of the present time to pay rates which will yield an income equal to the full return to be gathered when the country is populated and business developed in the full capacity of the road.

1

§ 1087. Construction now thought unwise.

It may turn out in some cases that some parts of the plant will prove of little value in the working of the system at a later time. In fairness it would seem that in such cases the question should be whether the expenditure seemed wise at the time it was made; if so that expenditure

1 Southern Pacific R. R. Co. v. Bartine, 170 Fed. 725 (1909). See

further, In Re Arkansas R. R. Rates, 168 Fed. 720 (1908).

should be considered like any other. This was put in extreme form in a Pennsylvania case,' where upon the reorganization of a system of water supply, one source formerly needing an expensive filtration plant was exclusively assigned to manufacturing purposes where filtering was unnecessary. Nevertheless the court held that the cost of the filtration plant remained capital entitled to full return. "It was a proper purchase under the circumstances," said the court, "and unquestionably represents a part of the investment of the Wilkes-Barre Water Company. Whether under the present system its function is as important as under the old system is immaterial. The money it represents was judiciously expended." 2

§ 1088. Portion of plant not now utilized.

As to such portion of the plant as is not utilized at all in the present operation, the problem is more difficult still. If this is being held in condition to operate in emergencies, which are not altogether improbable, it would seem plain in analogy to the decisions just discussed that it may be included. On the other hand, if it is not devoted to any present use, then it should be plain that allowance should not be made for it in estimating the cost. In this case property no longer of any use should be carried in a separate account, as property should be which is being held for use in the remote future. In accordance with these distinctions, a Federal court has allowed for

1 Wilkes-Barre v. Spring Brook Water Co., 4 Lack. (Pa.) Leg. News 367 (1899).

2 See Capital City Gaslight Co. v. Des Moines, 72 Fed. 829 (1896), where the court more cautiously suggests that as it is not shown that two gas plants, one for water gas, and the other for coal gas is even

3

now altogether bad practice it will allow for both, although by the preponderance of expert opinion in new construction such an arrangement would not be made.

3 Willcox et al. v. Consolidated Gas. Co., 212 U. S. 19, 53 L. ed. 381, 29 Sup. Ct. 192 (1909).

old gas works superseded but held in reserve, while the Minnesota court 1 refused to consider large tracts of land held for possible future freight terminals. These decisions are not necessarily inconsistent. The plant in the first case would be by most business men regarded as sufficiently devoted to the immediate business, while the land in the second case is plainly being carried more as a speculation. Business men would demand a business profit on the whole plant in the first case, but they might well be content to carry without profit unimproved lands, relying upon the appreciation of the property for their ultimate profit.

§ 1089. Equipment long since superseded.

The extreme form of this problem relates to superseded equipment. Take the case of a street railway which is constructed as a horse railway, then at great expense is changed to a cable road, then later at still greater expense is converted to an electric road, and then is obliged by statute to build a subway and place its tracks underground. It may have happened that all these expenditures were provided for by the raising of new capital for which securities are still outstanding. Would it be outrageous to ask that some return on this capital should still constitute a charge upon the present concern? In several cases some respect has been paid to this capitalization long after its tangible results have disappeared, notably in Milwaukee Electric Railway & Light Co. v. Milwaukee,2 where District Judge Seaman allowed $2,000,000 in addition to the actual value of the present properties, making an allowance for the necessary and reasonable investment in the purchase of the old lines and equipments, which

1 Steenerson v. Gt. Northern Ry. Co., 69 Minn. 353, 72 N. W. 713 (1897).

2 87 Fed. 577 (1898).